What Is SaaS Licensing? A Beginner’s Guide to Software License Management

With the fast-paced digital transformation where companies seek higher scalability, the concept of SaaS is booming like never before. According to Gartner, companies worldwide spent $116 billion on SaaS services in 2020. Companies are more focused on the ‘pay as you use’ models to grow their businesses seamlessly.

However, this modern approach necessitates an efficient SaaS licensing process. As companies engage in numerous SaaS subscriptions, managing them efficiently becomes time-consuming.

Addressing risks of shadow IT, underutilized licenses, and duplicate applications becomes imperative to avert financial setbacks. This is where the pivotal role of SaaS software license management emerges, offering businesses vital time, resources, and capital savings.

Let's delve into the fundamentals of SaaS licensing and explore its multifaceted benefits for businesses!

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What is SaaS licensing?

SaaS licensing is a subscription-based agreement that defines how users can access and use SaaS applications. Instead of a one-time purchase, users pay recurring fees, monthly or annually, for continued access to the software.

The license terms are set by the SaaS provider and typically cover usage limits, renewal terms, and compliance. This model shifts ownership to access, making it more flexible than traditional perpetual licensing.

SaaS licensing has multiple models that companies can choose based on their preferences. In addition, SaaS licensing comes in monthly and annual subscriptions.

You can also opt for free trials before taking out annual subscriptions. Trial periods can range from 7 to 30 days, and you’ll have access to all features, helping you choose the plan you want.

What is the difference between perpetual licensing and SaaS licensing?

Perpetual licensing and SaaS licensing comes with two different approaches to software access. Perpetual licensing is a one-time purchase while SaaS licensing uses a recurring model.

Here’s a detailed breakdown:

Perpetual licensing

A one-time upfront fee is paid to use the software indefinitely. However, updates, support, or maintenance might incur additional costs. Example: Microsoft Office

SaaS licensing

There are various licensing models available. It follows a subscription-based model where users pay a recurring fee (monthly or annually) to access the software hosted via the cloud. Updates, support, and maintenance are part of the package. No additional fees are required.

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Types of SaaS licensing models

SaaS licensing models define how users access and pay for cloud-delivered software. Vendors typically use one of six common models, each offering a distinct pricing structure and access level:

Flat-rate licensing

This SaaS licensing model offers a flat rate for a product over a set period, irrespective of usage. It includes all features and isn't customizable. It is ideal for small teams with regular usage patterns.

Per-feature licensing

In a per-feature licensing model, users are charged based on the specific features they choose to access or utilize within a product or service. This approach allows customers to tailor their expenses according to their needs, paying only for the essential or beneficial features.

Usage-based licensing

The prevalent choice among SaaS buyers lately has been the usage-based software licensing model, where charges are determined by how much you use the service.

In this approach, known as "pay as you go," your costs increase in line with your usage of the product and its functionalities. Using usage-based licensing gives your team greater flexibility to accomplish their strategic objectives.

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Per-user licensing

Per-user licensing, or per-seat licensing, involves paying for software based on your organization's number of users. This model typically includes different tiers or levels of access, accommodating varying user counts from smaller teams to entire enterprises.

To accommodate more users, you have to upgrade to the next tier. The most popular per-user SaaS licensing model example is Slack.

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Freemium

The freemium pricing model offers free access to a product with restricted features, serving as an entry point to entice users towards subscriptions or premium services. Typically, the freemium tier includes basic or entry-level features, encouraging users to upgrade for access to more advanced functionalities.

Tiered licensing

This licensing model offers the software in different packages or tiers, each with specific features and pricing. Users can choose the tier that best suits their needs. Usually, the lower-tier/basic plan will have basic features. You have to upgrade and move to higher tiers for more advanced features.

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The Key Benefits of SaaS Software License Management

SaaS software license management offers multiple key benefits like improved compliance, better cost savings, and operational efficiency. 

Here’s a detailed breakdown:

1. Pay-As-You-Go

Pay-as-you-go is the main USP of having SaaS licensing compared to perpetual subscriptions. Subscribers only need to pay for what they use over a certain period. It is convenient and affordable for small and big companies to keep their software costs under control.

2. Greater Scalability

Companies need scalability to meet fluctuating demands and operational needs. The SaaS licensing model solves this purpose by allowing effortless upgrading or downgrading of the subscriptions without the subscriber reaching out to the provider.

Another significant benefit is that SaaS software is usually easier to integrate with third-party services than traditional subscriptions.

3. Lower Operational Cost

SaaS leverages shared or multi-tenant environments, resulting in increased cost savings. Moreover, software as a service license does not incur software maintenance costs. Users can divide their plans, contributing to long-term capital savings.

4. Get the Latest Updates

SaaS providers upgrade their services and software to boost efficiency and improve the customer experience. When companies release these incremental updates, they are free of charge, and users only have to pay their subscription fees.

Further, the paid upgrades also cost less than the software costs incurred with the traditional model. Typically, SaaS licensing is cost-effective, passing over the benefits of economies of scale to the subscribers.

5. Easy-to-Use Remotely

Most traditional perpetual subscriptions are inefficient when used on multiple devices or at different locations.

On the contrary, SaaS is more straightforward to access through remote areas on other devices. Moreover, modern SaaS software is much easier to use than conventional software, with a minimum learning curve.

‍SaaS License Challenges That Every User Should Know

Managing SaaS licenses offers clear benefits, but also comes with challenges that organizations must be aware of. Common issues include dealing with multiple vendors, tracking actual usage versus license cost, and avoiding overprovisioning.

Here’s a detailed breakdown:

1. Managing Multiple Vendors

As the company grows, it requires multiple subscriptions from different vendors. As a result, SaaS license management becomes more time-consuming and complex.

2. Tracking Actual Usage vs. Cost

While using the pay-as-you-use SaaS model, it becomes difficult to track the actual software usage compared to the price charged by the vendor. Tracking SaaS usage is relatively straightforward for a small company, but when a company leverages dozens of SaaS licenses, the audit becomes more complex.

3. Overprovisioning

Most of the SaaS software allows the administrator to add more users than mentioned in the contract. However, this practice may lead to over-provisioning the application, causing challenges in achieving license compliance.

4. Missed renewals

When no comprehensive software tracks and manages SaaS applications, you’ll be more likely to miss out on renewals. License renewals must be tracked efficiently, and informed decisions must be made rapidly to renew or eliminate the license. Overlooking this process will lead to the auto-renewal of licenses and increased spending.

5. SaaS sprawl

Uncontrolled adoption of SaaS applications refers to SaaS sprawl. Redundant, duplicate apps make it challenging to manage the entire SaaS effectively. You need a SaaS licensing management platform to manage all the licenses and optimize them effectively.

Compared to software asset management (SAM), managing these cloud-based software licenses sometimes becomes more challenging and time-consuming.

What is software license management?

Software License Management (SLM) tracks and optimizes how software licenses are used within an organization. It covers everything from discovery and procurement to deployment, usage monitoring, and renewals.

The goal is to ensure compliance with licensing agreements, reduce unnecessary costs, and minimize legal or financial risks. Key tasks include:

License Procurement: Acquiring software licenses through purchases, subscriptions, or vendor management.

Monitoring and Tracking: Keeping track of the number of licenses owned and their usage and ensuring compliance with licensing agreements.

Optimization: Optimizing license usage to ensure that the organization has the necessary number of licenses without overbuying or underutilizing them for better ROI.

Renewals and Upgrades: Managing license renewals and upgrades and ensuring the software remains up-to-date.

Cost Management: Managing software license costs effectively by optimizing usage and negotiating favorable vendor terms.

Overall, software license management involves a range of practices and tools to efficiently control and administer software licenses' acquisition, use, and maintenance throughout their lifecycle within an organization.

Why is Software license management crucial for your business?

Software license management best practices are essential for maintaining compliance, avoiding financial penalties, and reducing security risks. As businesses adopt hundreds of SaaS tools, unmanaged licenses can quickly lead to overspending, legal exposure, and inefficiencies.

If a software as a service license is not appropriately managed, administrators can face multiple complexities, including:

1. Risk of Shadow IT

Shadow IT refers to purchasing and using resources without approval from the IT department. It occurs when organizations lack a standardized procurement process.

For example, if an employee finds more helpful software and buys that tool without approval from the IT department, it may create issues in the future. Without strict guidelines, the company pays more money as more employees will buy tools they find helpful.

2. Security and Compliance Issues

Unsecured SaaS software may expose the company to new cyber threats and security vulnerabilities. When the IT department purchases a SaaS tool without checking whether it’s secure, it might put the entire company in a risky situation.

This type of purchase also leads to several compliance issues the company may face during the yearly audit. So, companies must pay closer attention to access control and compliance issues.

3. Monetary Loss

Most SaaS tools come with an initial discount, or the vendors also offer bulk discounts for first-time users. So, over time, companies lose that discount and must pay the total price, increasing the operational cost.

4. Unused License

When a company has several redundant subscriptions, they pay for additional SaaS licenses they never use. For example, you purchased a SaaS license long ago but forgot to cancel it because you don’t use it frequently. So, unused licenses can leave a significant financial dent in the company’s balance sheet.

5. Duplicate Applications

On average, a company may have multiple employees with permission to purchase SaaS tools. In this scenario, there is a strong possibility that individuals buy the same software, which leads to duplicate applications in the organization.

Effective SaaS license management will help you rationalize those applications, increasing SaaS savings and ROI.

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‍Why Do You Need a SaaS License Management Solution?

A SaaS license management solution is essential for controlling costs, maintaining compliance, and improving software efficiency. Without proper license oversight, businesses risk overspending on unused tools or under-providing access to essential apps.

They may also face security vulnerabilities, compliance issues, and operational inefficiencies caused by license sprawl. With a license management solution, you can:

• Stop paying for unused licenses: These tools help you identify inactive users, so you can downgrade or focus on license harvesting instead of wasting budget.
• Prevent over-purchasing: By tracking real-time usage, you avoid buying more licenses than you need “just in case.”
• Improve user onboarding and offboarding: Assign the right tools from day one, and automatically revoke access when someone leaves, reducing security risk and license waste.
• Centralize license tracking across vendors: With one dashboard, you can see all license types, costs, and utilization rates across every SaaS vendor in your stack.
• Support budgeting and forecasting: Usage trends help finance and procurement teams project SaaS needs more accurately, avoiding budget shocks.

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SaaS License Management Platform: Key to Optimize SaaS Licensing

Companies often use manual methods like creating Excel sheets for software license management to overcome the above challenges. However, this manual method is prone to errors, so you need comprehensive SaaS license management software to optimize your SaaS portfolio.

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When companies integrate a SaaS management platform like CloudEagle.ai, they can have several benefits, including:

1. Spend Optimization

A SaaS management tool can integrate with your internal SSO, finance, HRIS systems, etc. These integrations enable the platform to see all the apps your teams use. This includes spend optimization, usage, purchased licenses, provisioned users, etc.

When you don’t use a SaaS platform for a certain period, the software license management tool will identify them and send you alerts. On the other hand, you also get an alert when software is overutilized. This feature of the SaaS licensing management platform comes in handy for SaaS license optimization.

2. Identifying Unused licenses

Platforms like CloudEagle.ai will display all the purchased licenses and their respective usages. You can configure a workflow for license reclamation. When the platform detects the license usage is lower than the threshold, it’ll automatically deprovision the user from the license, and you can consider license harvesting it to the user in need.

You can identify all unused licenses and either reallocate them or eliminate them during renegotiations.

3. No more shadow IT

CloudEagle.ai offers a proactive alert system designed to promptly notify users of any unsanctioned applications detected within the system. This capability is a preventive measure against the emergence of shadow IT in its early stages.

By receiving timely alerts, your organization can take swift action to maintain the security of its technology stack and optimize spend. This proactive approach ensures that unauthorized applications are identified early, allowing for effective control and adherence to IT governance policies.

4. Renewal automation

We discussed how renewals are a major challenge in the SaaS licensing model. It is impossible to track license renewals using spreadsheets. This is where CloudEagle.ai’s SaaS renewal management module can help you out.

It’ll extract all contract metadata and create a renewal calendar based on the renewal date. Once the workflows are configured, CloudEagle.ai will automatically send renewal reminders via Slack 90 days before the deadline. This proactive approach ensures staying ahead of renewals, preventing inadvertent auto-renewals that may escalate spending.

Pratibha Mehta and her team at Falkonry never missed out on renewals after using CloudEagle.ai. Here’s Mehta recalling her success story:

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5. Procurement Transparency

Outsourced procurement workflows are available in CloudEagle.ai to help organizations streamline their procurement processes. Workflows provide transparency, expedite the process, automatically send alerts to relevant stakeholders via Slack and email, and ensure the product is purchased by a team, avoiding delays and user frustrations.

CloudEagle.ai also has a team of expert SaaS buyers to work as an extended part of your procurement team. They’ll analyze license usage, conduct competitive analysis, leverage price benchmarks, provide negotiation insights, and help you ace your negotiations.

Or, if you have a lean procurement team, they’ll take over the negotiation process, engage with the vendor, and purchase the right SaaS licenses at the right price. They can also negotiate to eliminate unused licenses without impacting vendor relations.

Here’s how Nowports achieves 30% savings with the help of CloudEagle.ai’s procurement module; check out this insightful customer success story.

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Final Thoughts

SaaS licensing is the foundation of modern business tools, giving flexibility and easy access. Knowing and managing its types is essential for saving money and using it smartly.

This guide explored SaaS licenses and their perks, like flexible payments and saving costs. However, managing these licenses can be tricky, like handling many vendors and tracking usage.

Effectively managing SaaS licenses mitigates risks, ensures compliance, and maximizes your investment. Solutions like CloudEagle.ai streamline license management, save costs, and simplify operations.

SaaS license management platforms like CloudEagle.ai will provide complete visibility into your SaaS stack and help you streamline your procurement process, preventing decentralized purchases and optimizing your spend.

Book a demo today and explore how CloudEagle.ai can help you manage SaaS licenses.

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Frequently asked questions

1. How does SaaS licensing work?

In SaaS licensing, users pay for the product based on the subscription plan and payment duration. Once the subscription is over, users need to renew their subscription to continue using it.

2. What are the different types of SaaS licensing models?

There are several types of SaaS licensing models, including flat-rate pricing, tiered pricing, pay-per-use pricing, per-active user pricing, and per-feature pricing.

3. What essential things must I look for in a SaaS licensing contract?

While buying a subscription, check for the data being collected, how the data is used, pricing terms, license termination policy, and service level agreement.

4. What are SaaS licenses?

SaaS licenses grant users access to cloud-based software through subscription pricing. They define usage terms, user limits, and billing cycles for services like Slack, Zoom, or Salesforce.

5. What are the three types of software licenses?

Common software license types include proprietary, open-source, and subscription-based (SaaS). Each defines how software is accessed, modified, and distributed across users and organizations.

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